Why is EBITDA considered a closer proxy for cash flow by investors?

EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation, and Amortization, is often viewed as a closer proxy for cash flow because it excludes non-cash expenses, specifically depreciation and amortization. These two accounting methods allocate the cost of tangible and intangible assets over time, which can distort the actual cash being generated by a company's operations.

By removing these non-cash expenses, EBITDA provides a clearer picture of a company’s operating performance and cash generation capabilities. Investors are primarily interested in cash flow because it represents the actual liquidity available to the company for reinvestment, paying down debt, or distributing to shareholders. Thus, EBITDA serves as a useful measure to assess operational efficiency without the noise created by accounting policies related to asset depreciation.

While the other choices do have relevance in financial analysis, they do not specifically contribute to EBITDA's role as a proxy for cash flow in the same manner. For instance, focusing on revenue generation does not take into account the cost structure affecting actual cash flow. Including tax effects can complicate the view of operational performance since taxes can fluctuate widely based on various factors. Similarly, while accounting for net profit margins is important, it does not isolate the cash flow aspects the way EBITDA does.